Negative balance of cash in private ltd company

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

12 September 2013 IN ABC(P)ltd,there is negative of cash balance,and still there is pending of payment of share application money,so problem is how to get cash in positive,
Detailed solution is required.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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12 September 2013 Normally a negative cash balance should not happen unless a overdraft is granted by a bank or some other person/ agency.

So instead of playing around how to make cash balance positive, kindly show the same as overdraft on the liability side..

Querist : Anonymous

Querist : Anonymous (Querist)

16 September 2013 yes i can show it as overdraft but question is arise how to meet obligation of section 269ss of income tax act

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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03 August 2024 When dealing with a negative cash balance in a private limited company and outstanding share application money, it's essential to address both accounting and compliance aspects carefully. Here’s a detailed solution to resolve this issue:

### **1. Understanding the Negative Cash Balance**

A negative cash balance indicates that the company's cash outflows have exceeded its inflows, which could be due to various reasons such as expenses, unaccounted transactions, or overdrafts. Here’s how you can address it:

#### **a. Identify the Causes:**
- Review all transactions to understand why the cash balance is negative.
- Check for any accounting errors or misrecorded transactions.

#### **b. Reconcile Accounts:**
- Ensure that all entries in the cash book match with bank statements and other records.
- Adjust for any discrepancies.

### **2. Correcting the Negative Balance**

To correct a negative cash balance, consider the following steps:

#### **a. Arrange for Immediate Funds:**
- **Infusion of Capital:** Obtain funds from shareholders or new investors to infuse equity into the company. This can be in the form of additional share capital or loans from directors/shareholders.
- **Loans/Overdrafts:** If additional capital cannot be raised immediately, you may consider arranging a short-term loan or overdraft facility from banks or financial institutions. Ensure this is documented properly.

#### **b. Payment of Share Application Money:**
- Ensure that any pending share application money is paid as per the company's requirements.
- Document the payment and update the books accordingly.

### **3. Compliance with Section 269SS**

Section 269SS of the Income Tax Act prohibits accepting or repaying loans or deposits in cash exceeding Rs. 20,000. Here's how to ensure compliance:

#### **a. Avoid Cash Transactions:**
- **Use Banking Channels:** Ensure that all transactions, especially for repaying loans or accepting deposits, are carried out through proper banking channels. Avoid handling large amounts in cash.

#### **b. Proper Documentation:**
- Maintain records of all transactions including bank statements, agreements, and correspondence related to the loans or deposits.
- Ensure that all cash transactions above Rs. 20,000 are documented and reported.

#### **c. Rectify Existing Issues:**
- If any transaction is non-compliant with Section 269SS, rectify it immediately by converting it into a bank transaction or by documenting it properly.

### **4. Addressing Overdrafts and Loans**

If you opt for an overdraft or loan to resolve the negative cash balance:

#### **a. Document Properly:**
- **Loan Agreement:** Draft a formal loan agreement with the bank or financial institution detailing the terms and conditions of the loan or overdraft.
- **Board Resolution:** Pass a board resolution authorizing the overdraft or loan, and document it in the minutes of the meeting.

#### **b. Reporting and Compliance:**
- Report the overdraft or loan in the company’s financial statements as per the accounting standards.
- Ensure timely repayment of any loans or overdrafts and keep track of the interest payments.

### **5. Regular Monitoring and Management**

#### **a. Budgeting and Forecasting:**
- Develop and maintain a detailed cash flow forecast to manage cash resources effectively and avoid future negative balances.
- Regularly review and update the budget to ensure that the company operates within its financial means.

#### **b. Internal Controls:**
- Implement strong internal controls to monitor cash transactions and prevent unauthorized cash handling.
- Conduct regular audits to ensure accuracy and compliance with accounting standards and legal requirements.

### **6. Professional Guidance**

For specific advice tailored to your situation:
- **Consult with a Chartered Accountant:** Seek professional advice from a CA to ensure compliance with all legal and accounting standards.
- **Legal Compliance:** Ensure all actions comply with relevant laws and regulations.

By taking these steps, you can address the negative cash balance, meet the obligations for share application money, and ensure compliance with Section 269SS.

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